Q2 2017 Returns By Asset Class

For the last few quarters, I’ve posted returns by asset class (by representative ETF), as well as year-to-date, last twelve months, and last five years. While there is still no predictive power in this data, I updated those charts as of the end of Q2 2017 for those of you that are interested (see below).

Q2 2017 Asset Class Returns

A few callouts from the data:

· Most asset classes finished Q2 between +1.5% and +3.5%. The standout to the positive side was Foreign Developed markets (+6.4%) and the standout to the negative side was Commodities (-3.7% even after a fairly strong comeback in the last week and a half of the quarter) due mostly to falling energy prices. If there’s ever an asset class about which we should be ok with falling prices, it’s commodities. Lower gas prices, lower heating costs in the winter, and lower raw material costs for manufacturers combined with lower transportation costs, tends to keep consumer prices overall from rising too quickly.

· Year-to-date, Foreign Developed and Foreign Emerging markets are the strong winners, both up ~15%. Emerging market bonds have done really well too, up nearly 10%. These are also three of the asset classes that under-performed for much of the last 5 years and are finally starting to catch up to the US stock market.

· Despite the Federal reserve hike in short-term rates in June, the third hike since December, aggregate bonds and short-term bonds had (slightly) positive Q2 and year-to-date. Higher rates generally mean lower prices for bonds, but this is offset somewhat by the interest (which increases with higher rates) that those bonds pay. As long as rates don’t spike quickly, and as long as we stay away from long-term bonds (we do), bonds will continue to do fine and will continue to add a cushion to overall portfolios.

· The chart of the last 12 months really shows how diverse return have been across asset classes. Commodities have lagged badly, Real Estate Investment Trusts (REITs) have been slightly negative, US bonds have been about flat, Emerging markets bonds decently positive, High Yield bonds even better, and US Large, US Small, Foreign Developed, and Foreign Emerging markets doing well (thought the US outperformed in 2016 and it’s Foreign markets that have been getting it done so far this year). A portfolio that mixes all these asset classes together, all of which have positive expected returns for the long-term future, but none of which perform in lock step with each other, will have a positive long-term expected return as well, but with a much smoother ride than any individual asset class. This is the power of diversification.

· Repeating from last quarter as I know not all of you have the time to read this each quarter… On the five-year chart, you can clearly see the marked underperformance of foreign stocks (developed and emerging markets), emerging market bonds, and most notably, commodities (everyone remembers the massive declines in energy prices back in 2015). While commodities have bounced back after bottoming in early 2016, they have a long way to go to regain their highs, and that is a very good thing for worldwide consumers (though not so good for oil-producing / oil-exporting countries). The underperformance of international markets can be viewed in one of three ways: 1) international stocks are now dirt cheap as compared to US stocks, OR 2) international economies are doing much more poorly than the US economy and therefore, due to limited future growth, their stock markets have fairly performed much more poorly than US stocks OR 3) some combination of the two. There is no way to know the answer, so we will remain diversified and will continue to include foreign stocks at a ratio of about 1:2 vs. US stocks in most portfolios. I’m confident the tide will turn eventually and foreign markets will outperform their US counterparts. We just can’t know when it will happen and so instead of trying to pick winners or losers, we believe it makes more sense to invest globally and be confident that population growth + productivity growth + inflation will result in nominal growth on average across all geographies and that in turn will result in long-term growth for a globally diversified portfolio of stocks.

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